MANAGEMENT OF RECEIVABLES

MANAGEMENT OF RECEIVABLES[/b]

Meaning:[/b]

· Receivables represent amounts owed to the firm as a result of sale of goods or services in the business.

· Receivables results from credit sales

· It forms a part of current assets.

· Also known as Accounts receivable, trade receivables, customer receivables and book debts.

· The purpose of maintaining or investing in receivables is to meet competition and to increase the sales and profits.

COST OF MAINTAINING RECEIVABLES:[/b]

1. Cost of financing receivables:[/b]

· Concern incurs some costs for collecting receivables

2. Cost of collection:[/b]

· Proper collection of receivables is essential for receivables management.

· Customers who do not pay the money during a stipulated credit period are sent reminders for payment or sent some persons for collecting the amount.

· All these costs are known as collection cost

3. Bad debts:[/b]

· Amount which the customer fail to pay are known as bad debts.

· Concern may able to reduce bad debts through efficient collection machinery

Factors influencing the size of receivables:[/b]

1. Size of credit sales

2. Credit policies

3. Terms of trade

4. Expansion plans

5. Relation with profits

6. Credit collection efforts

7. Habits of customers

Forecasting the receivables:[/b]

Forecasting the receivables is an estimation which will help the concern in planning its receivables. The following factors will help in forecasting receivables:

1. Credit period allowed:[/b]

· The ageing of receivables is helpful in forecasting

· Longer the amounts remain due, the higher will be the size of receivables

· Increase in receivables will result in more profits as well as higher costs too

· Collection expenses and bad debts will also be more.

· If credit period is less, then the size of receivables will also be less

2. Effect of cost of goods sold:[/b]

· Increase in sales results in decrease in cost of goods sold.

· Sales should be increased to that extent where costs are low.

3. Forecasting expenses:[/b]

· Receivables are associated with number of expenses

· Costs of receivables are more than the income, further credit sales should not be allowed.

4. Forecasting average collection period and discounts:[/b]

· Average collection period is more than the size of receivables will be more.

· Average collection period:

X No.of working days

5. Average size of receivables:[/b]

· Determination of average size of receivables will helpful in forecasting receivables.

· Average size of receivables:

= Estimated annual sales X Average collection period

DIMENSIONS OF RECEIVABLES MANAGEMENT:[/b]

Receivables management involves the following aspects:

1. Forming of credit policy:[/b]

· Every company must adopt a credit policy. Credit policy relates to

a. Quality of Trade accounts or credit standards[/b]:

· Volume of sales will be influenced by the credit policy of a concern.

· By liberalizing credit policy, the sales will be increased,

· The increased volume of sales will be increased the cost and risk of bad debts

· Credit to only creditworthy customers will save costs like bad debt losses, collection costs and investigation costs etc

· Quality of trade accounts should be decided so that credit facilities are extended only upto the optimum level.

b. Length of credit period:[/b]

· It means the period allowed to the customers for making the payment

· Customers paying well in time also be allowed certain cash discount.

· Concern fixes its own terms of credit depending upon its customers and volume of sales.

c. Cash discount:[/b]

· Cash discount is allowed to immediate payment of customers

· Discount allowed involves cost

· Financial manager compare the cost of discount and the amount of fund realized

· Discount should be allowed only if its cost is less than the earnings.

d. Discount period:[/b]

· Collection of receivables influenced by the period allowed for availing discount

· Additional period allowed for this facility may prompt some more customers to avail discount and make payments.

2. Executing credit policy:[/b]

· After formulating credit policy proper execution is important.

· Evaluation of credit applications and finding out the credit worthiness of customers should be undertaken

a. Collecting credit information:[/b]

· Collecting credit information about the customers is the first step in implementing credit policy.

· Information should be adequate and proper analysis about the financial position of the customers is possible.

· Sources of collecting credit information are financial statements, credit rating agencies, reports from banks etc.

b. Credit analysis:[/b]

· After gathering information , analyse the creditworthiness of the customer

· Credit analysis will determine the degree of risk associated, the capacity of the customer to borrow and his ability and willingness to pay.

c. Credit decision:[/b]

· After analyzing the creditworthiness of the customer, decision has to take whether the credit is to be extended and then upto what level.

· Match the creditworthiness of the customer with the credit standard of the company.

· If customers creditworthiness is above the credit standards then the credit is allowed.

3. Formulating and executing collection policy:[/b]

· Collection policy be termed as Strict and Lenient.

· Strict policy of collection will involve more efforts on collection

· Such policy will enable early collection of dues and will reduce bad debts losses.

· It may also reduce the volume of sales.

· Some customers may not appreciate the efforts of the concern and may shift to another concern thus causing reduced sales and profits.

· A lenient policy may increase the debt collection period and more bad debt losses.

· Collection policy should devise the following steps:

§ Sending a reminder for payments

§ Personal request through telephone etc

§ Personal visits to the customers

§

 

[Dhruv Bindhani]

MANAGEMENT OF RECEIVABLES[/b]

Meaning:[/b]

· Receivables represent amounts owed to the firm as a result of sale of goods or services in the business.

· Receivables results from credit sales

· It forms a part of current assets.

· Also known as Accounts receivable, trade receivables, customer receivables and book debts.

· The purpose of maintaining or investing in receivables is to meet competition and to increase the sales and profits.

COST OF MAINTAINING RECEIVABLES:[/b]

1. Cost of financing receivables:[/b]

· Concern incurs some costs for collecting receivables

2. Cost of collection:[/b]

· Proper collection of receivables is essential for receivables management.

· Customers who do not pay the money during a stipulated credit period are sent reminders for payment or sent some persons for collecting the amount.

· All these costs are known as collection cost

3. Bad debts:[/b]

· Amount which the customer fail to pay are known as bad debts.

· Concern may able to reduce bad debts through efficient collection machinery

Factors influencing the size of receivables:[/b]

1. Size of credit sales

2. Credit policies

3. Terms of trade

4. Expansion plans

5. Relation with profits

6. Credit collection efforts

7. Habits of customers

Forecasting the receivables:[/b]

Forecasting the receivables is an estimation which will help the concern in planning its receivables. The following factors will help in forecasting receivables:

1. Credit period allowed:[/b]

· The ageing of receivables is helpful in forecasting

· Longer the amounts remain due, the higher will be the size of receivables

· Increase in receivables will result in more profits as well as higher costs too

· Collection expenses and bad debts will also be more.

· If credit period is less, then the size of receivables will also be less

2. Effect of cost of goods sold:[/b]

· Increase in sales results in decrease in cost of goods sold.

· Sales should be increased to that extent where costs are low.

3. Forecasting expenses:[/b]

· Receivables are associated with number of expenses

· Costs of receivables are more than the income, further credit sales should not be allowed.

4. Forecasting average collection period and discounts:[/b]

· Average collection period is more than the size of receivables will be more.

· Average collection period:

X No.of working days

5. Average size of receivables:[/b]

· Determination of average size of receivables will helpful in forecasting receivables.

· Average size of receivables:

= Estimated annual sales X Average collection period

DIMENSIONS OF RECEIVABLES MANAGEMENT:[/b]

Receivables management involves the following aspects:

1. Forming of credit policy:[/b]

· Every company must adopt a credit policy. Credit policy relates to

a. Quality of Trade accounts or credit standards[/b]:

· Volume of sales will be influenced by the credit policy of a concern.

· By liberalizing credit policy, the sales will be increased,

· The increased volume of sales will be increased the cost and risk of bad debts

· Credit to only creditworthy customers will save costs like bad debt losses, collection costs and investigation costs etc

· Quality of trade accounts should be decided so that credit facilities are extended only upto the optimum level.

b. Length of credit period:[/b]

· It means the period allowed to the customers for making the payment

· Customers paying well in time also be allowed certain cash discount.

· Concern fixes its own terms of credit depending upon its customers and volume of sales.

c. Cash discount:[/b]

· Cash discount is allowed to immediate payment of customers

· Discount allowed involves cost

· Financial manager compare the cost of discount and the amount of fund realized

· Discount should be allowed only if its cost is less than the earnings.

d. Discount period:[/b]

· Collection of receivables influenced by the period allowed for availing discount

· Additional period allowed for this facility may prompt some more customers to avail discount and make payments.

2. Executing credit policy:[/b]

· After formulating credit policy proper execution is important.

· Evaluation of credit applications and finding out the credit worthiness of customers should be undertaken

a. Collecting credit information:[/b]

· Collecting credit information about the customers is the first step in implementing credit policy.

· Information should be adequate and proper analysis about the financial position of the customers is possible.

· Sources of collecting credit information are financial statements, credit rating agencies, reports from banks etc.

b. Credit analysis:[/b]

· After gathering information , analyse the creditworthiness of the customer

· Credit analysis will determine the degree of risk associated, the capacity of the customer to borrow and his ability and willingness to pay.

c. Credit decision:[/b]

· After analyzing the creditworthiness of the customer, decision has to take whether the credit is to be extended and then upto what level.

· Match the creditworthiness of the customer with the credit standard of the company.

· If customers creditworthiness is above the credit standards then the credit is allowed.

3. Formulating and executing collection policy:[/b]

· Collection policy be termed as Strict and Lenient.

· Strict policy of collection will involve more efforts on collection

· Such policy will enable early collection of dues and will reduce bad debts losses.

· It may also reduce the volume of sales.

· Some customers may not appreciate the efforts of the concern and may shift to another concern thus causing reduced sales and profits.

· A lenient policy may increase the debt collection period and more bad debt losses.

· Collection policy should devise the following steps:

§ Sending a reminder for payments

§ Personal request through telephone etc

§ Personal visits to the customers

§

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